The foundation of personal finance is cash management. Most of the decisions you make about your money will require a knowledge of how much you have, how much you earn and how much you spend. These things determine where you are at now. This is the starting point of your journey toward your goals. Even if you already know where you are going, it’s not possible to chart a course unless you know from where you are beginning.
Understanding and managing your cash flow helps you ensure that you don’t run out of money. Most people seem to know what it’s like to run out of money at the end of the month, or to live paycheck to paycheck. Worse, an unforeseen bill, perhaps for car repair or a new fridge, is far more painful if there is no money to pay it. These situations cause us stress and worry. By planning ahead and controlling your money, you are more likely to have money when you need it. Further, by planning to have some amount of money left at the end of each month, you start to make progress toward your goals.
Many people focus first on investment decisions. There are countless resources with advice on how to invest. Those choices, however, are much less important than cash management habits. For example, consider a woman I worked with who invested a $10,000 settlement, then ran up $8,000 in debt. Does it matter whether it grew by 3% or by 7% over that year? Not really, since she had already overspent and now needs to withdraw the funds to pay off her debts. The first priorities in cash management are paying bills on time, saving and paying down debt.
It all comes down to developing good habits. Much of what we do every day is the result of habits. Habits help us to conserve mental energy, by saving us from making the same decisions repeatedly. Once we have good habits in place when handling our money, we can spend less time and energy worrying about it.
Some people successfully use a budget to control or keep track of their spending. But most people seem to cringe whenever the word “budget” is mentioned. If you already use a budget and are happy with it, I commend you. For everyone else, please consider the following alternative.
I don’t use a budget. I don’t write cheques to pay bills. I don’t spend time each week tracking my finances. It’s the result of developing good habits early on, and they’ve kept me on track. The first step is to know what I can afford to spend each month. Many people have a regular paycheck. I don’t, but I still have an idea of how much I can expect to earn and, on average, it’s not too far off.
I also have a very good idea of how much I spend in a given month. I have a certain lifestyle and it doesn’t vary much from month to month. I’ve even automated bill payments by having them all come directly from my bank account. Then, each month, the only time I need to spend on my finances is reviewing my bank account statement and my credit card statement. I know whether or not I’ve earned and spent what I expected, and how much is left. With the money that’s available at the end of the month, I can choose whether to use it towards savings, debt repayment or unplanned spending.
You can save a lot of time and worry by developing good habits. If you always spend less than you earn, you don’t have to worry about following an inflexible budget. The important thing is to know how much is coming in, how much is flowing out and how much is building for your future. The steps in this station will help you get a very clear picture of these flows.
What good habits do you have? What areas lack discipline?